FEC Enforcement Trends: Federal Contractors in the Crosshairs

In the last several years, the Federal Election Commission (FEC or Commission) has significantly stepped up enforcement of one provision of federal campaign finance laws, commonly referred to as the "Federal Contractor Ban." To understand the reasons behind this trend, as well as the factors that influence the outcome of particular enforcement matters, the Holland & Knight political law team undertook a comprehensive review of recent FEC decisions involving the Ban.

All told, we reviewed a total of 17 enforcement matters resolved over the past five years involving credible allegations that respondents violated the Federal Contractor Ban. Of these, 12 of the matters were resolved in 2022 alone, underscoring the recent surge in Federal Contractor Ban matters.

Background: A Longstanding Prohibition Comes into New Focus

The Federal Contractor Ban dates back to 1940, when Congress passed a series of reforms intended to address the exploitation of government contractors by political party bosses. Now codified at 52 U.S.C. Section 30119, the Federal Contractor Ban broadly prohibits federal government contractors from making contributions or expenditures in connection with federal elections. Specifically, the Ban applies to contributions made by a corporation or partnership with a government contract, an individual under contract with the federal government and sole proprietors with government contracts.

During most of the modern era of campaign finance regulation, the Federal Contractor Ban was primarily relevant to individuals or sole proprietors who contracted with the federal government. This is due to the fact that the Ban applies only to the specific person or entity that enters into a covered contract. Corporations were already prohibited by other provisions of the Federal Election Campaign Act (FECA) from making contributions or expenditures in connection with federal elections. Because the general corporate ban was broader and applied to a much larger set of corporate political activities, the Federal Contract Ban broadly reinforced this existing prohibition for the subset of corporations with federal government contracts.

That all changed with a series of federal court decisions that dramatically expanded corporate actors' ability to play a direct role in federal elections. These decisions – including Citizens United v. FEC and SpeechNow.org v. FEC – allowed corporations to pay for independent expenditures advocating for or against particular candidates and to make contributions to federal "Super PACs" that focus their activities on independent expenditures.

While federal court decisions had relaxed the general corporate ban, the Federal Contractor Ban remained in place. Many corporate executives who were eager to take advantage of the new avenue for corporate political engagement overlooked the Ban. The result was a series of violations of the Federal Contractor Ban in the form of contributions to federal Super PACs.

For nonprofit organizations that advocate for campaign finance reform and the diligent enforcement of campaign finance laws, corporate violations of the Federal Contractor Ban presented an appealing target. These groups filed a series of complaints with the FEC alleging violations of the Ban, which contributed to the surge in enforcement matters.

Our Findings: Notable Patterns in the Enforcement Record

Of the 17 enforcement matters that we reviewed, nine resulted in the assessment of a civil penalty by the FEC, while the remaining eight did not result in any penalty.

Our review of the matters that resulted in a civil penalty uncovered a number of common themes, though there were also some interesting variations.

• They often involved contributions by corporate entities to prominent Super PACs affiliated with one of the two major political parties. In particular, three of the matters involved contributions to the Congressional Leadership Fund (a major Super PAC focused on electing Republicans to the House of Representatives), two featured contributions to the Senate Leadership Fund (dedicated to electing Republicans to the U.S. Senate), and two involved contributions to America First Action (a Super PAC associated with former President Donald Trump).
• Civil penalties were closely tied to the amount of the violation. These amounts tended to range from a low of 9 percent of the amount of the violation (in two separate cases) to a high of 24 percent (in one case). In five of the nine cases, the penalty was between 17 percent and 19 percent of the amount of the violation.
• By contrast, there was a significant variation in the amount of the contributions at issue, with total amounts ranging from $25,000 to $1 million. There were no matters involving contributions of less than $25,000 that resulted in a penalty (though as noted below, several such matters resulted in dismissal).
• In all nine enforcement actions, the respondent obtained at least a partial refund of the original contribution. This likely offset the financial consequences of the civil penalties in question, which as noted above were a maximum of 24 percent of the amount of the contribution. Setting aside the costs of participating in the FEC's enforcement process (including the expenses of retaining counsel and putting in place a compliance framework), each of the respondents made an ostensible "profit" – all told, the sum of the refunded contribution, less the civil penalty, ranged from a low of $20,300 to a high of $915,000. There are signs that the FEC Commissioners are focused on the apparent contradiction of this state of affairs and that they may apply more scrutiny going forward, potentially even requiring that contributions made in violation of the Ban be surrendered to the U.S. Department of the Treasury.

• The federal contracts at issue covered a wide range of business lines, from office supplies to jet fuel and emergency management to lab equipment. The value of the federal contracts at issue also varied widely, from a low of just over $22,000 to a high of $27.8 million. Notably, the Commission appeared to be dismissive of mitigation arguments based on the size of federal contracts at issue or their importance to the overall business of the respondent.

The eight matters that did not result in a civil penalty also had common features.

• The most significant uniting theme of the cases with no civil penalty appears to be the small size of the contribution at issue. The Commission appears to be inclined to dismiss matters as an act of prosecutorial discretion to conserve agency resources (often referred to as a Heckler dismissal) where the contribution amount was less than $25,000. Of the eight matters where no civil penalty was assessed, seven involved contributions below that threshold.
• The only matter that involved a contribution in excess of $25,000 featured a federal contract that was very limited in scope. Specifically, MUR 7890 (Service Tire Truck Center Inc.) turned on what were essentially retail purchases of tires and automobile servicing by the General Services Administration on a total of three occasions, none of which exceeded $4,000 in total value. Given this sparse record of commercial activity in this matter, the FEC ultimately decided that seeking a civil penalty from Service Tire Truck Center Inc. was not a good use of agency resources.

These matters highlight the most effective arguments in seeking to have an apparent violation of the Federal Contractor Ban dismissed. Assuming that the complainant has made a prima facie case that a violation occurred (e.g., that a corporate entity that holds a federal contract made a contribution to a federal Super PAC), respondents have historically been likely to prevail if the contribution was less than $25,000, or if the contracts at issue were made up of a small number of discrete retail transactions. By contrast, the Commission has been less solicitous of other arguments advanced by respondents in the cases we reviewed.

Notably, the FEC Commissioners do not appear willing to entertain First Amendment arguments, perhaps in recognition of the fact that federal courts have (in cases such as Wagner v. FEC, decided in 2015) consistently upheld the Federal Contractor Ban against constitutional challenges. The FEC also rejected arguments based on advice of counsel (in an interesting case in which a respondent's political law counsel failed to spot that a proposed contribution violated the Ban).